There are two main levels that profit can function as an incentive in business. The first is at the level of the firm. If a particular market is lucrative, new businesses will enter that market, because the potential for profit has incentivized their entry. The second level is the level of the employee. A company might decide to motivate its employees to take an interest in the company's success by sharing some of its profit among them as part of their compensation.

Economic Profit

The term "economic profit" refers to the total amount of profit for a business or market after taking into account traditional measures of cost and revenue, also known as "accounting profit," as well as "opportunity cost," which is the potential benefit of the next best alternative. For example, if Sally is contemplating a college degree, to find her economic profit, she must take the total benefit she expects to gain and subtract not only the cost of school but also the money she could otherwise make by working a job during the time she would be in school.

Market Entry

If a particular market has a positive economic profit for its firms, that implies that selling in this market is more profitable than the next best alternative. Positive economic profits lure new entrants to the market, because the market is most profitable way for them to invest their time and money. This is how profits can incentivize companies -- the prospect of positive economic profits draws them to markets.

Profit-Sharing

The accounting profits that a company makes can be used as a tool for motivation for employees. Several companies use different forms of this approach. Some simply share some of the profits directly with the workers. A company also can issue stock as part of the workers' compensation, which is less directly tied to profits. Profit-sharing techniques can give employees a vested interest in the company's success, motivating them to work harder, but they can also cause employees to have decreased income due to lower company profits, even when the decrease in profits was not their fault.

Profit and Ethics

Many unethical practices, such as deception in marketing, might be good for short-term profits, but harmful in the long term. A business that loses the trust of its customers loses its market. For example, a supermarket might lie about the quality of its fresh fruit to sell it, but customers won't come back to that supermarket after they learn they have been deceived. A business that is open and honest with its customers will build up a long-term and mutually-beneficial relationship with them, even if that comes at the cost of potential short-term profits.

About the Author

Andrew Gellert is a graduate student who has written science, business, finance and economics articles for four years. He was also the editor of his own section of his college's newspaper, "The Cowl," and has published in his undergraduate economics department's newsletter.